New Trends in the Used-car Market

Once the domain of small, independent dealers, the secondhand market is being transformed as major auto companies offer “certified pre-owned” cars.

By Philip Liu

Major automotive companies in Taiwan have been vigorously moving into the used-car market – mainly for sales of their own brands – in an effort to tap the huge business potential and facilitate sales of their new cars.

The most recent entrant is the Ford Lio Ho Motor Co., which this July began selling “Ford Assured” used Ford cars at four of its dealers – in Taoyuan, New Taipei City, Tainan, and Kaohsiung. The program is to be extended to other locations around the island in the coming year. Ford Lio Ho offers quality certification and warranties for the second-hand cars it is offering. It stresses that the “Ford Assured” vehicles are relatively new and have a clear origin, as most of them were previously driven by Ford managerial staff or were used by the company for display purposes or test driving.

Quality certification is available for each vehicle that passes a check of 158 items by Ford technicians, including the chassis, engine, and gearbox, as well as a test drive. Buyers therefore have the assurance that problematic cars have been excluded, such as those that were involved in crashes, submerged in floods, or stolen and given a forged engine number. In addition, the cars come with a warranty of one to two years or a maximum driving distance of 40,000 kilometers. The warranties cover some 100 key parts and components for eight major systems, including the engine, transmission, and electrical and fuel injection systems. In addition, buyers can return the used cars if they are dissatisfied with the quality within a 10-day test-driving period.

Most of the competitors in the Taiwan market have had similar certified-quality used-car programs – known as CPO (certified pre-owned) systems – for at least the past several years. One attraction was the huge volume of the domestic used-car market, where sales last year reached 550,000 units, compared with 380,000 for new cars.

Another motivation was the potential of the used-car operation to facilitate sales of new vehicles, since 90% of new-car sales in Taiwan are for replacement purchase. The ability to trade in a used car easily and for a good price serves to encourage car owners to buy new models. Thanks to their expertise and equipment, the major auto firms are in an advantageous position in selling their own CPO cars, as they can accurately detect hidden problems, thereby assuring quality.

Hotai Motor Co., the general agent in Taiwan for the Toyota Motor Co., started the trend in 2004 when it set up a subsidiary, Hozhi Motor, to engage in the CPO-car business. It wished to take advantage of the huge used-car market for Toyota models, as the brand holds a high market share (around 37%) among domestically produced autos. In addition, Toyotas are able to command relatively high prices in the used-car market, amounting to about 70% of the original price for a three-year-old car. (The level is similar for another Japanese brand, Honda).

Encouraged by the thriving business of Hozhi in northern Taiwan, Hotai then established Horong Motor in 2012 to follow the CPO business model in southern Taiwan, and then Hozhong Motor in 2013 for central Taiwan.

The CPO business has contributed significantly to the business of Hotai Finance, which last year was the market leader with some NT$55 billion (US$1.8 billion) in new loans. The channel has also offered an outlet for old cars retired by Hoyun Leasing, another Hotai affiliate.

Sales of Lexus, the premier brand from Toyota, have been a major contributor to Hotai’s CPO car business. As with Ford, the cars include those that were previously driven by the company’s managers or used for exhibition or trial driving, as well as vehicles that had been on lease. But even most of the cars that formerly had private owners have a clear maintenance records, since an estimated 90% of Lexus owners take their cars to a Lexus facility for repair and maintenance. All CPO Lexus cars are entitled to a minimum warranty of two years or 40,000 kilometers of driving, and buyers can return the cars in their original status within a 14-day trial period if dissatisfied. So far, Hotai has sold some 5,000 CPO Lexus cars.

Other foreign premier auto brands are also promoting the CPO business, seeing it as a way to introduce their models – often deemed as symbols of social status – to new customers. Audi Taiwan, for instance, has set up showrooms in Taipei, Taichung, and Kaohsiung for its CPO cars. Besides offering a safe and reliable source for used cars, it provides complete repair and maintenance records, warranty, and a seven-day trial period. If the car is undamaged and was driven for less than 500 kilometers, the buyer has the option of exchanging it for another car in stock.

Mercedes-Benz Taiwan has also been selling CPO cars – again, mostly vehicles that had been used by the company executives or for display or trial driving, with some only having been on the road for a few months. The motivation is to develop brand loyalty that may later translate into sales of new Benz cars and also to reduce the number of Benz cars on the market through unauthorized “parallel” imports.

Along the same lines, Pan-German Motors, the distributor of BMW cars, has been engaged in CPO sales. It notes that its CPO cars have all undergone rigorous checks by its technicians regarding appearance, inner structure, chassis, engine, and electric system.

Creating alliances

Seeing a large business potential, some auto companies have been tapping the used-car market more broadly, not just for their own CPO cars. Fortune Motor, the general agent of the China Motor Co. (CMC), part of the Yulon Group and the producer of Mitsubishi vehicles in Taiwan, set up the SUM used-car alliance in 2004. SUM has since become the leading used-car brand on the island, with 400 used-car dealers and 270 garages as members, including 70 operations owned by Fortune Motor itself. According to Fortune and SUM manager Liu Yi-hsian, SUM now holds a 40% share of the used-car market. “Alliances have become the mainstay of the local used-car market, as they have more credibility and can provide better protection to customers,” explains Liu. “Generally speaking, used cars with less than one year of usage are priced at 80% of the new-car equivalent, and an extra 5% discount is given for every additional year of usage.”

Cars sold by the member dealers bear quality certificates issued by SUM after the latter’s technicians complete a check of 136 items of the cars, providing assurance they were not victims of flooding or major accidents, and are not stolen cars with forged engine numbers. The check also validates the accuracy of the driving-distance record on the odometers. SUM’s vehicles come with a one-year or 20,000 kilometers warranty for the engine, gearbox, power steering system, and starter motor.

The Yulon Motor Co. has also stepped into the used-car market, setting up the SAVE used-car alliance whose verification system checks 168 items in nine major systems of the car. To date, the alliance’s team of technicians has examined over 260,000 used cars. A warranty of one year or 20,000 kilometers covering major systems is available on cars sold by member dealers.

Branded alliances such as SUM and SAVE have become a mainstay on the domestic used-car market, attracting the participation many used-car dealers in order to win the trust of consumers in a rather chaotic market. Quality certification from such alliance usually enables member dealers to command a premium of 10-20% on the prices they offer.

Another such group, the Best-quality secondhand-car alliance, was founded in 2011 by Lin Sung-hao, a veteran in the car-repair and used-car businesses. The alliance, which has ISO9001:2008 certification, certifies the cars sold by its member dealers, guaranteeing they are not flooded cars, former taxis, cars of major accidents, or stolen cars and providing a warranty for the engine, gearbox, power steering system, and compressor.

Non-alliance dealers often seek third-party certification to strengthen their credibility. Minlung Auto, a used-car dealer in Taipei, for instance, has arranged for certification from TÜV Rheinland of Germany, especially for premier European brands.

Consumers can even find used super-luxury cars on the market. Examples of such glamorous vehicles, including Lamborghinis and Bentleys, are sitting in the showroom of New Lucky Auto in Hsinchu, whose customers include executives of hi-tech firms in the area. Manager Chou Hsin-kan says these cars, obtained from the general agents, sometimes have been driven for less than 2,000 kilometers. A two-year used Lamborghini Aventador LP 700-4 can be purchased at a 20% discount from the original price of NT$25.38 million (US$846,000). Because of the difficulty in securing a steady supply of used super-luxury cars, however, Chou says the company will switch its focus to used premium cars, such as Porsche.

Even alliance membership, however, cannot totally prevent the fraud and forgery long prevalent in the used-car market. According to industry insiders, for instance, some less scrupulous dealers buy cars that have been in a collision at low cost and transfer the engine number to stolen cars, giving the latter a legitimate identity. Others collude with technicians to alter the distance shown on the odometer in order to fetch a higher price from buyers. This type of fraud may evade the detection even of veteran dealers, especially for purchases made at auctions. The problem is often discovered by technicians of the original auto firms, using specialized computers or checking maintenance records, when the new owners bring the cars in for maintenance or repair.

To evade responsibility, some dealers exclude liability for such fraud in the transaction contract, a provision that may appear in fine print. Legal disputes often arise. To decrease the risk, Tseng Ching-wei, former chief editor of AutoNet, advises used-car buyers to choose popular rather than special models, whose original owners may tend to overuse their cars. Other experts advise buyers of secondhand cars to choose vehicles that are only a few years old to avoid exorbitant repair costs.

Taiwan Business TOPICS

Taiwan Business TOPICS is published monthly by the American Chamber of Commerce in Taipei, and covers current topic affecting business conditions in Taiwan, an Industry Focus section on a particular industrial sector, and other reports prepared by the magazine’s staff of experienced professional journalists.